By Steven Kopits<p>
Steven Kopits manages the New York office
of Douglas-Westwood, an energy business consultancy. Douglas-Westwood assists
energy companies with market research, strategy development, and transaction
support. The views presented here are his own.
</p>

Electric cars have been competing with the internal combustion engine for more than a century, and they have never won. Batteries are more expensive, have less range, and require more time to recharge than it takes to fill a gas tank. In late 2010, U.S. Energy Secretary Steven Chu himself articulated the challenge, stating that battery companies have to develop units that last 15 years, improve energy storage capacity by a factor of five to seven, and cut costs by about a factor of three in order for electric cars to be comparable to cars that run on gasoline and diesel.

U.S. energy policy has tried to address these challenges. The Energy Department and other agencies have supported the development of battery and recharging technology. In addition, the U.S. government has provided financial support to Nissan, General Motors, Tesla, and Fisker to develop and manufacture commercial electric vehicles (EVs). The government hopes such investment can spur economies of scale, thereby reducing unit costs and making new technologies viable.

So far, though, these efforts have failed to produce any game-changing breakthroughs. Battery range remains strictly limited, and electric vehicles remain disproportionately expensive, with batteries alone costing as much as $15,000. The plug-in, hybrid electric Chevy Volt retails for $40,000 before a $7,500 federal tax credit, and the all-electric Nissan Leaf starts at $27,700 after the tax credit. These vehicles are also less capable than their gasoline-powered counterparts, prompting Johan de Nysschen, president of Audi of America, to observe in 2011, "No one is going to pay a $15,000 premium for a car that competes with a [Toyota] Corolla."

He has been proved right. In 2011, the Leaf sold only 9,700 units in the United States, and Chevy sold only 7,700 Volts. There were 13 million vehicles sold in the United States last year, meaning that electric vehicles comprised a meager 0.1 percent of the market.

It is hard not to be pessimistic about the future of electric cars, especially given that government funding is unlikely to increase. Not only has austerity become an economic reality, but electric vehicle funding has become something of a political liability. With the best of intentions, the government is subsidizing second cars for the very richest members of society. Both the Tesla (which has the body of a Lotus) and the gorgeous Fisker Karma sports car (created by BMW-designer Henrik Fiskar and assembled in Finland) retail for more than $100,000. These are not products for the top 1 percent; these are products for the top 0.1 percent.

The demographics for the Volt and the Leaf are only marginally better. According to Nissan, Leaf buyers are college-educated and have household incomes of $140,000 per year. According to General Motors CEO Daniel Akerson, the average Volt purchaser earns $170,000 annually. In short, electric car policy is helping precisely those who should not be subsidized by the government, and as a result, sustaining and increasing such funding will prove challenging.

Is the electric car then history? Will the Leaf and the Volt go the way of the ill-fated EV1, General Motors’ electric car from the 1990s?If the status quo persists, they very well might. There are, however, reasons to believe that electric cars might find a viable niche after all — if we use them in the right way.

For the last several years, Google has been testing self-driving cars, primarily in California and Nevada. Its vehicles use lasers, radars, and other sensors to establish their position and identify objects around them. This data is interpreted by artificial intelligence software that enables the vehicle to drive itself. Google’s vehicles have now proved themselves in hundreds of thousands of miles on the road. And Google’s not the only game in town. Bosch is also developing the technology, and Cadillac has promised to have a car capable of driving autonomously on the highway by 2015. Self-driving technology is gradually moving to commercialization, and when it does, it will liberate the car from its driver, enabling a vehicle to serve more users.

According to the Transportation Department, the average U.S. vehicle is used less than one hour per day — a utilization rate of about 5 percent. Many Americans only drive their cars to work, park, and leave them until they drive home at night, making them essentially unavailable for use by others for most of the day. But if the car could drive itself, it could return home to take the children to school, members of the family shopping, and seniors to visit friends or keep appointments. If the vehicle served even one additional passenger, its utilization rate would double, and its capital cost per user would fall by half.

This is exactly the solution needed to remedy the poor economics that currently stymie electric vehicles. Even if better or cheaper batteries are not developed, electric cars could still be economically viable if their utilization rates were double those of today’s gasoline-powered vehicles.

The viability of electric vehicles would be further enhanced if they were used as a service, rather than purchased as assets. For example, electric cars could be employed as driverless taxis. In some places, like New York City, taxis are ubiquitous because keeping a private vehicle is prohibitively expensive and inconvenient to park. In other parts of the country, taxis are scarce and expensive. In the town of Princeton, New Jersey, for example, taxis are found only at the train station, and the brief round trip from there to downtown Princeton costs approximately $40. Of this, only $5 represents vehicle-related costs; the remainder is attributable to the driver. At usage rates rivaling that of taxis — perhaps 100 miles per day — electric cars are quite competitive because of their lower operating costs. Thus a self-driving electric car could also make the same round trip at a cost of only $5. For a twice-daily, off-peak user, the monthly cost of vehicle access could be less than $300 — much less than the cost of car ownership.

Consuming transportation as a service would also help compensate for three noneconomic weaknesses of electric vehicles: limited size and capacity, limited range, and extended recharging time. Most regular cars can seat four or five, be driven 300 miles, and carry a trunk full of goods. On most days, however, the typical driver uses only a fraction of these capabilities. As most households can only afford one car per driver, the consumer buys more vehicle than is strictly required for daily commuting in order to preserve the option of traveling greater distances with a large load and several people. General Motors has attempted to sell the Volt on just this limited-use basis, that most people drive less than 40 miles per day. True enough, but most consumers will buy a vehicle that they can use for all their activities, not just those on a typical day.

If transportation could be purchased as a service, however, this constraint would be lifted. Localities could have a fleet of electric vehicles on call for local trips, allowing EVs to operate within short distances only — just as the typical taxi does. This would permit electric vehicles to find a successful niche without fundamental improvements in range or load. As such, an EV would not replace every car for every driver, but it could fulfill a key role in local transportation and reduce the number of vehicles per household or allow marginal users, like senior citizens, to maintain a high level of local mobility without having to own a car.

Purchasing transportation as a service would also reduce recharging requirements. Recharging technology is improving, but it remains to be seen whether EVs will ever be able to recharge as quickly as a gasoline tank can be filled. If transportation can be purchased as a service, then not every EV must be fully recharged at the same time, nor must each vehicle be fully recharged prior to use — something that would present risk to an owner entirely dependent on a single EV. Thus, while faster charging is better, self-driving EVs — used as a fleet — would be able to function effectively even in the absence of superfast recharging.

In short, self-drive technology offers the promise of electric vehicles with economic and functional viability even in the absence of major technological improvements.

The market for self-driving technology is large — my firm estimates it at $25 billion per year. The key customers would be senior citizens who do not wish to drive or are looking for more economical transportation; soccer moms, who often spend hours per day chauffeuring children back and forth from school and activities; and executives lured by the ability of the vehicle to drop them off and go park itself. Indeed, once the idea of sending the car to park itself takes hold, it is almost irresistible. Self-driving cars would be the biggest time-saving breakthrough since the washing machine.

Moreover, they offer an economical alternative to mass transit. Traveling by train is often touted as the wave of the future. In truth, Amtrak’s prices don’t compete with the cost of automobiles today, and they are horribly uncompetitive vis-à-vis intercity buses. Would hugely expensive bullet train infrastructure reduce the cost of a train ticket? It seems unlikely.

Nor are buses a realistic alternative for daily commuting for most people. A recent USA Todayarticle recounts the story of a university employee in Arizona who lost her car to an accident and decided to take the bus instead. Her daily commute increased from 20 minutes to one hour each way. Do the math, and her monthly commuting time increased by the equivalent of three working days. Increasing the working month by three days is not social progress — it is a social and economic catastrophe. By contrast, self-driving electric vehicles offer a more flexible and lower-cost solution that combines the custom experience of a car with the environmental and economic benefits of public transport. Think of self-driving EVs as customized public transportation.

Self-driving electric vehicles will also help compensate for a lack of oil. The oil supply has not increased materially for the past seven years, even as Chinese demand has soared. As a result, the Chinese are bidding away U.S. oil consumption, which has dropped 16 percent per capita since 2005. If we want to maintain our physical mobility, we will have to turn to other sources of energy. Self-driving electric cars will not dominate the future — given a choice, consumers have time and again shown a preference for gasoline- and diesel-powered cars — but they should find a viable niche in local transport, which constitutes the bulk of daily driving in the United States. By 2025, they could comprise 15 to 20 percent of vehicle sales. Thus, the road transportation system, which has been entirely dependent on oil-based fuels, will become more diversified. Road transport will come to look more like the power system, with oil, natural gas, and battery power all playing a role and filling different niches in different ownership structures. Relatively few people may own self-driving electric cars, but many people may rely on them for daily transportation.

Interestingly, neither the Republican Party nor Democratic Party has embraced self-driving technology. Either of them could. For Democrats, self-driving technology promises to be the enabler of electric vehicles, in which the party has vested so much emotion and prestige. On the other hand, Democrats seem viscerally incapable of proposing alternatives to oil that are economically viable or increase individual consumption. Will gee-whiz automobile technology find a home with the left?

For Republicans, anything to do with green technology carries a stigma. On the right, batteries and green technologies are the stuff of rent-seeking, bureaucratic-meddling, dead-end wastes of money. And self-driving technology could vindicate the left’s investment in electric vehicles. On the other hand, self-driving technology could be good business and requires only a proper legislative framework, not an endless stream of subsidies.

Thus, both the left and the right have reasons to embrace or reject self-driving technology. But the technology will continue to develop and, bit by bit, be deployed commercially. It promises a brighter future, where technology once again helps improve lives and make the world a better place. For a country beset by economic stress and uncertainty, self-driving technology offers a vision of a better tomorrow, a more optimistic world. We should embrace it.